We have embraced the 21st century by entering such cutting-edge industries as brick, carpet, insulation and paint. Try to control your excitement.
— Warren Buffett, 1969.
There are a few gems on the SGX. They can come from a range of industries. There are the cyclical ones which were caught in a bad time and poised for a sector re-rating. There are mismanaged ones, which can be set on the right path by turnaround specialists (savvy operators with the Midas touch). There are some operating in industries perceived as boring and unsexy, whose latent value is hidden from plain sight, waiting to be uncovered. They are diamonds in the rough, under-appreciated and unloved by Mr Market.
The subject of interest is this company from a traditional and old-fashioned industry. They are a manufacturing business, operating in the supply-chain space. They grease the wheels of commerce. Whether you’re FMCG, petrochemical, pharmaceutical, or construction, or any of the industries out there that require transportation of goods, you’ll inevitably use their products.
Every year they churn out around $40m of revenue and around $4m of net profit. That’s net profit margins of 10%, something few companies can boast about. They are quite generous too, retaining 50% of that and paying out the other 50% to shareholders. This behaviour is the exception rather than the norm. It’s probably because shareholding is not overly concentrated in the hands of a few. The original co-founders who started the company some 40 years ago have since stepped back from their executive roles into advisory roles, letting a new generation of leaders take over. Many in the management are substantial shareholders themselves, so their interests are directly aligned with minority shareholders.
They have been innovating on their products. A key thing they did was to figure out the pain points of their customers and help them succeed. They set aside capex to work together with educational institutions to create new products to ride on the themes of digitalization and sustainability. They operate out of dated factories, but in terms of sustainability they are way ahead of their time. In fact, their production process is so sophisticated that they are almost a zero-waste facility. Over the years, they managed to increase quality while reducing costs for customers — guess what that did for their market share!
In fact, their service is so reliable and their relationships so entrenched, that their clients (MNCs operating across geographical boundaries) have insisted that this company continue to service them as they push into the emerging markets around us. Even though the labour costs in these markets are lower, these clients are willing to pay them the same rates as in SG, just so they continue to use their top-notch service. Talk about trust!
The dividend yield is a solid 5–7%, cemented by ballooning cash balances. At current draw-down rates, that yield is sustainable for many years well into the future. In fact, cash balances are continuing to accumulate. I wonder what the management will do when it accumulates way in excess of capital requirements. Perhaps return the money to shareholders via a capital reduction exercise? Or a special dividend to celebrate their upcoming 45th year anniversary? That might just be my wishful thinking.
It’s a family-run business, linked by webs of inter-connectedness. The current generation of leaders are nearing their retirement age. Will they want to continue sharing the fruits of the business with minority shareholders? Or will they want to bring the business home, i.e. privatise the company at a premium to entice minority shareholders to sell the shares to them? One can only wonder. They have not embarked on any fund-raising exercise for a very long time, and will not need to do that for the foreseeable future, but yet remain listed and have to comply with onerous listing requirements. Based on what other companies in their position have done previously, it’s not difficult to make an educated guess as to the eventual outcome.
Perhaps insider purchases can give us some indication of their intention. Over the past year, the Managing Director has repurchased over $280k worth of shares from the open market. In the report, it was disclosed that the Managing Director took home a salary of between $250k-$500k. Lets assume the MD made the average of $375k. If so, that’s 75% of personal earnings thrown straight into increasing the stake in the company! When a person sells, it can be for any variety of reasons. But when a person buys, it can only be for one reason — to make money.
The shareholder list reveals a bunch of low-profile (and savvy) investors, who have a track record of investing early in multi-baggers. These investors tend to go for companies which are easy to understand, conservatively run, has intrinsic value hidden off the books, are profitable even in the worst of times, shareholder friendly, net-nets, or a mix of these factors. What special insight do they have, and how have their allocated their capital?
The questions are convoluted, and the process can be painstakingly slow, but I love it. I love the intellectual challenge and mental stimulation.
